Can the Mortgage Crisis Heal Itself?

With President Obama introducing an expansion of what many are calling a failed program, there are critics speaking out about the best ways to solve the housing crisis. On one end of the spectrum, some senators like Barbara Boxer and Johnny Isakson want the FHA, Fannie Mae and Freddie Mac to refinance every mortgage that they hold at the current mortgage rate around 4 percent. Their idea would place no consideration on the homeowner’s credit score or the value of the home as long as the borrower has been current on their payments. But would this solve the problem?

Critics say this would not work. With homeowner equity falling by more than $7 trillion since the start of the housing bubble, many analysts are saying this is not the best answer. The Congressional Budget Office has estimated that refinancing all of the Fannie Mae and Freddie Mac loans would result in nearly 3 million homeowners being able to refinance their mortgage. As a result, there would be about 111,000 fewer homeowners defaulting on their mortgage loan.

But an article by Anthony Sanders in USA Today says that refinancing these nearly 3 million mortgages would only generate about $7.5 billion during the first year. As a result, only a tenth of one percent would be added to the overall economy through personal spending. And that figure is making the assumption that people would spend that extra money rather than put it into a savings account.

If refinancing these homes at a lower rate won’t work to solve the problem, would it help to reduce the mortgage principal to make the loan come down to what the homes are actually worth? While this could stimulate the economy and prevent some defaults, it would basically be a $7 trillion bill to the federal government. And if you’ve been keeping up with the news and how far in debt the nation is in, it’s no surprise that bringing down the principal balance isn’t the solution either.

The article concludes by saying the best solution is to let the mortgage market heal itself. Sanders, who is a professor of real estate finance at the prestigious George Mason University, says the mortgage problem will solve itself if we can improve economic growth and reduce unemployment. While this sounds like a great idea in theory, Sanders does not give any insight in the article about how to do this. He spends the entire article criticizing the possible solutions while offering no solution of his own.

So can the mortgage problem fix itself if we simply focus on reducing unemployment and increasing economic growth as Sanders says? If so, how can we do that? Or has the mortgage problem outgrown its option to fix itself and, as a result, needs the federal government to step in with a variety of plans, programs and solutions? Let us know your thoughts below.